Market Optimism Abounds: A Trump Presidency Spells Good News for Small-Cap Stocks
As the dust settles on the recent election, market analysts are predicting a prolonged period of growth, driven in part by the anticipation of a more business-friendly environment under President-elect Donald Trump. According to Aniket Ullal, head of ETF research at CFRA, this shift in policy could have a significant impact on the stock market, particularly for small- and mid-cap stocks.
A Regulatory Reprieve
One of the primary drivers of the initial market rally was the expectation of reduced regulations in the financial and energy sectors. This perceived relaxation of regulatory oversight has led many investors to flock to ETFs, which Ullal believes will continue to benefit from this trend. “This is generally bullish for ETFs,” he noted.
Small-Cap Stocks Poised for Growth
Jay Hatfield, chief investment officer at Infrastructure Capital in New York City, agrees that a Trump presidency will be beneficial for smaller U.S. companies. However, he emphasizes that it’s not just about market capitalization, but rather specific sectors that will drive growth. Hatfield debunks the common myth that smaller companies are inherently more leveraged and interest rate-sensitive, citing that it’s actually the sectors within the index that tend to be more sensitive to interest rates.
A Shift in Federal Policy
Hatfield predicts that the Federal Trade Commission will become more lenient under Trump, leading to increased consolidation in various industries. This, combined with the potential for a reduced corporate tax rate, could have a significant impact on small-cap stocks. “There will be a new tax bill, and a corporate tax reduction will be in that bill,” Hatfield said, predicting a 25% gain for the S&P 500 Index next year, with small-caps potentially outperforming that mark.
Valuation Levels Support Small-Cap Growth
Ullal notes that the initial rally in financial sector stocks was driven by the expectation of a more relaxed regulatory environment. Additionally, the valuation levels of large-cap stocks, with a forward price-to-earnings ratio of 22.3, make small- and mid-cap stocks, with ratios around 17, appear more attractive. “Large caps are already richly valued,” Ullal said. “That can continue for some time, but at some point, we may hit a ceiling.” As a result, many investors are likely to shift their focus to smaller, more undervalued companies.
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